Portugal’s recovery isn't really a recovery at all

Earlier this month Portugal surpassed expectations when it reported the
strongest quarterly growth in the European Union, seemingly confirming its
position as “the good student” of the EU-IMF-ECB “troika”.

Portugal has to cut its deficit from 5.5pc this year, down from 6.4pc in 2012, and to 4pc by end of 2014Photo: Reuters

But there are fears that the GDP data were an anomaly and rather than signifying a turnaround in the economy, the country will sink back into recession by the end of year, and that further planned austerity measures will crush any early signs of recovery.

“We are clearly seeing stabilisation on many fronts,” said Filipe Garcia, an economist at Infomacao de Mercados Financeiros in Lisbon. “But as long as there is austerity being implemented, the economy will remain in a fragile state,” he warned.

And there is certainly more austerity to come if Portugal is to meet the budget deficit targets imposed as part of €78bn (£67bn) bail-out from the EU and IMF.

When Portugal went cap in hand to European partners in April 2011 for the three-year aid package, after refinancing interest rates rose to unsustainable levels, the Lisbon government committed to undertake radical measures to correct public finances and increase the economy’s efficiency.

Nearly two and a half years later and despite relentless austerity packages, Portugal is still – while not technically in recession – suffering the effects of its harshest economic contraction in 40 years, with unemployment at a record rate of nearly 17pc.

Although the GDP figures – which showed the country had emerged from recession with a 1.1pc rise in second-quarter growth, largely because of a sharp rise in exports – offered a ray of hope, the government was keen to play down the good news. While positive on a quarterly basis, they still revealed a sharp 2pc drop on an annualised basis and Lisbon insisted the apparent recovery would not slow the assault on the high budget deficit.

The positive figures hinged on a surge in traditional exports such as shoes, olive oil and car parts, but was accounted for in large part by the opening of a new diesel unit at the Galp oil refinery in Sines. But that refinery is already running at full capacity and the quarter-on-quarter recovery was helped by seasonal factors, including an early slowdown because Easter fell in March.

The prime minister, Pedro Passos Coelho, vowed to press ahead with tough spending cuts even after his government came close to collapse last month, after a rift over prolonged belt-tightening triggered the resignation of two senior ministers. The coalition partners brokered a deal and saved the country from imminent political crisis, but the episode highlighted the fragile political situation of a government under pressure at home to soften austerity.

In October, the coalition is due to unveil a budget containing a further €3.6bn of cuts, including the deeply unpopular measures of eliminating yet more public sector jobs, slashing pensions and reducing benefits.

“I have no doubt that Portugal will return to recession fairly soon and that we will remain there throughout 2014,” said Joao Galamba, an economist and MP for the opposition Socialist party. “Portugal is completely dependent on discourse in Europe and as long as they continue to promulgate the point that Portugal is a success story and give it everything it needs to survive then we shouldn’t have a problem.”

But he is among those who believe Portugal is a long way off being able to finance itself and that a second bail-out is inevitable in all but name.

“Portugal will not be able to finance itself when it has to return to the markets unless it has the European funding vehicles behind it,” Mr Galamba said.

“We will be completely reliant on support from European institutions for external funding for the next few years.”

Brussels is said to be considering a “precautionary programme”; in essence a “soft bail-out” that will provide Lisbon with a line of credit from the European Stability Mechanism rescue fund if it can’t finance itself by May 2014 when the current bail-out ends.

That would come with its own conditions, which may not be so intrusive as the current troika terms but would nevertheless restrict Portugal’s ability to soften austerity.

The government predicts an overall contraction of 2.3pc this year and possible growth of just 0.6pc by end of 2014, a view deemed optimistic by many.

Meanwhile, it has to cut its deficit from 5.5pc this year, down from 6.4pc in 2012, and to 4pc by end of 2014.

It seems likely that the Portuguese government, beset by unpopularity among an electorate feeling the pain of austerity and still reeling from July’s internal rift, will at least attempt to soften that deficit target when it meets with international lenders next month.

“Portugal’s economy is hardly roaring back to life, with domestic demand still contracting and a further increase in public indebtedness,” he said.

“As always, much hinges on the external environment and the extent to which fiscal consolidation makes it more difficult for the economy to experience a durable and sustainable recovery. There’s still considerable uncertainty about whether Portugal’s economy can stand on its own two feet, particularly given the significant funding challenges in 2014 and 2015.”

It seems austerity still has a long way to run in Europe’s most westerly nation.

Accepting austerity

Already Western Europe’s poorest country, Portugal is suffering the worst recession since democracy was established after the 1974 Carnation Revolution ousted a four-decade dictatorship.

Despite the hardships, with a jobless rate that has more than doubled in five years to almost 17pc and an average monthly salary of just €700 (£603), the social breakdown predicted at the start of austerity has yet to emerge.

Unlike the riots on Athens’ streets or the demonstrations in Spain, the Portuguese have reacted relatively calmly.

Several general strikes and the occasional peaceful public street protest have had little impact on tempering the austerity measures, and with the next general elections not due until 2014, people seemed resigned to their fate.

“There was a time when the Portuguese thought they might be able to overthrow the government and kick out the troika, but not now,” said Joao Galamba, an MP in the opposition Socialist party. “Public outrage would manifest itself if the government tried to introduce a policy that was considered wildly unfair, but for the most part, people are accepting of what needs to be done to transform the country.”

That said, a recent poll found 82.5pc of the population thought the country should renegotiate bail-out terms, and 55pc said they believed Portugal will plunge into an even deeper economic crisis once the current bail-out programme expires.